Nigeria’s Has $16.99bn Negative Net FX Reserves – Report
Nigeria’s external reserve has been estimated to be about $17 billion at the end of the financial year 2022, according to Cordros Capital Research recalculation using the IMF methodology.
In a macroeconomics comment released by the investment firm today, Cordros Capital noted that before now, there have been divergent opinions on the actual state of Nigeria’s FX reserves, given that the CBN only publishes the gross FX reserves without comprehensive information on FX liabilities.
However, the firm said the CBN’s 2022 financial statement has allowed analysts to review the country’s international FX liquidity position and net reserves using the IMF’s standardised methodology.
It said the liquidity position has implications on the CBN’s ability to support the FX market comfortably and, by extension, the exchange rate. Based on its re-performance, Cordros Capital Research said Nigeria’s liquid reserves are about 35.0% of the current gross FX Reserves of about $39 billion. The firm said the net international reserves of a central bank are the difference between reserve assets and liabilities.
“According to the IMF, reserve liabilities are all foreign exchange liabilities to residents and non-residents, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options) and all credit outstanding from the Fund”.
The analysis excluded any assets that are pledged, collateralized, or otherwise encumbered, claims on residents, claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forwards, swaps, and options), precious metals other than gold, assets in nonconvertible currencies, and illiquid assets.
Cordros Capital Research estimated a negative balance of $16.9 billion as Nigeria’s net FX reserves as of the end of 2022. It said In line with the CBN’s guidance, N461.50/USD is the exchange rate was used in converting the naira balances to US dollars.
“In our view, the low international liquidity position clarifies why the CBN’s FX supply to the official windows has been underwhelming in the past three years even when the gross FX reserves settled as high as USD41.57 billion in September 2021”, the firm said.
CBN’s FX Liquidity Position Suggests FX Pressures May Remain Intact
The report added that the significant implication of the low CBN’s international FX liquidity position is that the apex bank’s FX intervention to support the domestic currency will remain underwhelming until there is a significant FX inflow into the economy.
Cordros Capital said the preceding will also likely erode foreign investors’ confidence in the economy.
“Aside from the aforementioned, given that foreign investors have chosen to remain on the sidelines amid the current prohibitively low domestic interest rates and export earnings remain low, we expect the naira to remain on the back foot and depreciate further against the US dollar in the near term”, analysts said.
The report noted that the expected lingering exchange rate pressure also implies that domestic inflationary pressures will be sustained over the rest of the year, more so that PMS prices are expected to remain high.
Analysts maintained that given the CBN’s low international foreign currency liquidity position, foreign investors may demand higher yields on Nigeria’s sovereign instruments, making the country’s external borrowing costs remain prohibitively. #Nigeria’s Has $16.99bn Negative Net FX Reserves – Report Survival Threatens as Bank of Agriculture’s Negative Equity Capital Widens
